The debt ceiling and the danger of default

May 4, 2023

There are three things that are important to understand about the debt ceiling fight and the risk of default (in increasing order of importance):

  1. The Biden administration keeps saying that the US has never defaulted on its debt. That’s flatly untrue. The US has defaulted several times, most recently during the Carter administration. This is not to say that we should default, but facts matter.
  2. If the government continues to spend beyond its means, it will eventually pile up enough debt that it cannot service it. At that point it will either default or monetize the debt (which amounts to the same thing). Thus, working to rein in government spending is working to prevent default, not cause it.
  3. The federal government has more than enough current revenue to continue to service its debt even if its authority to issue new debt is exhausted. Reaching the debt ceiling does not cause a default. It would however mean that there’s not enough money for some other things.

    Thus, there will be no default unless Joe Biden chooses to spend current revenue on things other than servicing the debt. When Biden talks about the risk of default, that is an outcome that he alone controls. It is a threat.

    The 14th Amendment ought to prohibit Biden from carrying out the threat, but it’s never been tested in court. In 2011, Pat Toomey submitted a bill called the Full Faith and Credit Act that would have clarified this, thus ensuring that no default could take place, but it did not receive a vote in the Democrat-controlled Senate.

This is all essential to know to understand where the risk of default is coming from.